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In recent weeks there have been two significant events:
- US election outcome.
- Initial efficacy data from the Pfizer/BioNtech and Moderna Covid-19 vaccine trials.
Both events have impacted the market and their ramifications are likely to continue do so in the period ahead.
Our take on the news
A Biden victory was the over-whelming favourite in betting markets and indeed the stock market had priced in a Democratic sweep of the White House and Senate running into the election.
Although Biden has won the White House, the Senate appears likely to remain in Republican control; the Republican party outperformed expectations.
From a market perspective this is very good news - we get the positives of a Biden win but without the less market friendly initiatives such as penal tax increases (both corporate and personal), less aggressive healthcare reform and a more centrist, predictable presidential approach to international relations.
Whilst the lack of a Senate majority significantly limits the new administration’s room for more radical tax and healthcare reform, we would still expect a post-Covid stimulus package of sorts as well as a roll back of many of the environmental deregulations that have occurred under President Trump.
We would expect rhetoric with respect to the regulation and potential break up of several large technology and ecommerce companies to be stepped up, although the shape and impact of any regulation on share prices is still too early to predict.
Whilst we do not have the full data from the Pfizer/BioNtech vaccine trial the initial read is of course encouraging (the same applies to the Moderna trial which is being published as we write).
We must await the full data but from a market perspective this news changes the probability of a return to normality sooner; we can debate what the new normal looks like and indeed how quickly that reversion takes place but this news suggests that a worst case is substantially less likely.
This news has had a substantial impact on companies which are more economically sensitive, or which have been negatively impacted by work from home/lockdown policies such as travel & leisure.
What it means for the portfolio?
It is hard to disaggregate exactly which piece of news has had which impact, but we would make the following points:
- No corporate tax increase is good news for our US holdings in aggregate along with many internationally listed companies which earn US$ revenue.
- Less aggressive healthcare reform is helpful for our healthcare holdings.
- The vaccine result has increased the probability that companies benefitting from re-opening begin to feel that impact in H1 2021 though most of the impact will likely be felt in H2 2021. The market is a forward-looking indicator and has begun to price this in; observing this re-pricing in action on 9 November was quite incredible. It was the most remarkable day we can remember in careers spanning over 20 years.
- Interest rates have started to rise as growth expectations are revised upward. This has impacted valuations in the more expensive part of the market as the present value of the cashflows expected to be delivered in the future declines.
- If the global economy recovers in 2021-22 and corporate earnings with it, we expect market returns will be more evenly distributed across a broader range of sectors and companies than was the case in 2020. Why pay a huge premium for stocks that have already performed well and look, in our view, extremely expensive by historic standards?
The combination of the election result and vaccine news has resulted in a significant rotation within the market.
Financials such as banks and insurance companies, industrials and select consumer discretionary stocks (particularly travel and leisure), which have been relatively weak performers in 2020 have begun to reflect a more optimistic outlook for next year.
In 2021 we believe the world will begin to move towards a more normal pattern of investment and consumption, which is not yet fully reflected in share prices.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
The product uses derivatives for efficient portfolio management which may result in increased volatility in the NAV. The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.
As a result of COVID-19, markets have seen a noticeable increase in volatility as well as, in some cases, lower liquidity levels; this may continue and may increase these risks in the future. In addition, some companies are suspending, lowering or postponing their dividend payments, which may affect the income received by the Invesco Perpetual Select Trust plc UK Equity Share Portfolio and the Invesco Perpetual Select Trust plc Global Equity Income Share Portfolio during this period and in the future.
The product invests in emerging and developing markets, where difficulties in relation to market liquidity, dealing, settlement and custody problems could arise.
The Directors intend that each portfolio will effectively operate as if it were a stand-alone company. However, prospective investors should be aware that in the event that any of the portfolios have insufficient funds or assets to meet all of its liabilities, such a shortfall would become a liability of the other portfolios. In addition, should the investment trust incur material liabilities in the future, a significant fall in the value of the investment’s trust assets as a whole may affect the investment trust’s ability to pay dividends on a particular class of share portfolio, even though these are distributable profits attributable to the relevant portfolio.
The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.
Where Stephen Anness has expressed opinions, they are based on current market conditions, may differ from those of other investment professionals and are subject to change without notice.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
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